The Bayesian Approach to Capital Allocation at Operational Risk: A Combination of Statistical Data and Expert Opinion

Mohamed Habachi and Saâd Benbachir
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Mohamed Habachi: Department of Management Sciences, University of Mohamed 5, Rabat 10052, Morocco
Saâd Benbachir: Department of Management Sciences, University of Mohamed 5, Rabat 10052, Morocco

IJFS, 2020, vol. 8, issue 1, 1-25

Abstract: Operational risk management remains a major concern for financial institutions. Indeed, institutions are bound to manage their own funds to hedge this risk. In this paper, we propose an approach to allocate one’s own funds based on a combination of historical data and expert opinion using the loss distribution approach (LDA) and Bayesian logic. The results show that internal models are of great importance in the process of allocating one’s own funds, and the use of the Delphi method for modelling expert opinion is very useful in ensuring the reliability of estimates.

Keywords: capital allocation; Bayesian approach; value at risk; Monte Carlo; expert opinion; Delphi method (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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